Give me your thoughts about this strategy/potential deal?

[Nick Ferguson]

I currently have 1 rental property and I'm looking to purchase a second in early 2017. I have contacted a broker who thinks that he will be able to qualify me for a conventionally financed home with between 10-20% down. I just purchased a new primary residence so therefore cash reserves are low and I'm planning on using a HELOC to obtain cash for the down-payment on the 2nd property. My investment goals are to purchase house that cash flow positive. I don't need the income as I have a full-time job but cash flow is my primary goal as a retirement strategy and wealth building tool. I want to repeatedly utilise cash-flow profits and equity to purchase more houses to grow my portfolio long term.

Could anyone who wants to, please look over these numbers and tell me a) what you think about the strategy overall, b) what you think about my leverage situation after execution? Should I be looking at higher or lower valued properties for house #2 to make the strategy work? 

House 1 (actual numbers but rounded off for ease of discussion)

Rent: $1150

Mortgage: $555

Cash flow using 50% rule = $20

Actual cash flow for 2017 = $215 (has been higher previous 3 years)

Mortgage payments remaing = 112 (9 years, 4 months)

Mortgage balance remaing = $35,500

2012 Appraisal = $66,000

current zestimate = $73,000

HELOC (numbers estimated... Assuming high interest rates and minimum payments)

HELOC for $18,000 based upon $73,000 value and complete utilization of the line of credit (worst case scenario) would result in the following payments. These payments assume an 8.24% interest rate which is what someone at Huntington quoted me over the phone without running my credit or any due diligence. I'd hope for a lower rate but plan for the worst.

10 year draw period interest only payments = $125 per month (additional principle payments made ideally)

20 year fixed payment assuming no principle reduction = $235 per month

$235 payments would begin approximately 8 months after the primary mortgage on house #1 is paid off.  

The financial side of the decision comes from whether the potential purchased house (house #2) covers the additional $125 per month payment on the HELOC of house #1.

House #2 hypothetical #1

Rent = 750

Mortgage payment = $325

cash flow using 50% rule = $50

This would be a theoretically bad decision as the cash flow is less than the HELOC interest only payments...

House #2 hypothetical #2

Rent = 750

Mortgage payment = $200

cash flow using 50% rule = $175

This would be a theoretically good decision as the cash flow is more than the HELOC payments.

I know that these margins are slim and I only provide them for illustrative purposes to show where the cutoff between net negative and net positive are. I also know that I need to run a full evaluation and figure in up-front costs to get my COC, actual proforma and other things like reserve cash for emergencies. I'm simply wanting advice on the general strategy in regards to my specific situation with house #1. I may not use the entire $18,000 and therefore have lower payments or I may use the whole HELOC but get a duplex or SFR with higher rents but the strategy would be the same. Obviously, I want some actual cash flow, not just offsetting the HELOC payments so that would be factored into the numbers for any "take home" cash flow.